The US employment report for August was much weaker than anticipated, but it is just the latest economic release to come in below expectations.
We have had weaker than anticipated retail sales figures in a number of countries, as well as softer than forecast sentiment and activity surveys, and a very disappointing UK GDP reading for July.
Data over the past year have generally been stronger than expected, triggering significant upward revisions to GDP growth forecasts for 2021 and 2022.
However, data released in the past month or so have been below forecast. There are clear signs that the Delta variant has slowed the pace of recovery. This doesn’t mean that the recovery is being derailed, but it has lost momentum.
It shows Covid continues to have a major impact on activity, despite the highly effective vaccine roll-out. Another factor holding back the pace of recovery has been supply bottlenecks in terms of shortages of raw materials, as well as capacity constraints in transport.
This has been impacting on manufacturing and construction activity in particular.
Labour shortages are also being widely reported, especially in the services sector, which is affecting the ability of businesses to meet the surge in demand as economies re-open. It may be that income support measures are slowing the return of workers to jobs, although these programmes are winding down.
It would also appear that some employees are still reluctant to return to the workforce. Covid may have also seen some workers move away from their previous place of employment, making it harder to match labour supply to jobs.
Certainly, where hard data are available, they make for startling reading. July’s US jobs report showed openings increased to yet another new record high of 10.9 million. In the UK, it will be interesting to see whether the ending of the furlough scheme leads to a spike in unemployment.
In the eurozone, the jobless rate had declined to 7.6% by July, not far above its pre-pandemic level of 7.1%. However, the full impact of Covid will only become apparent when government supports are withdrawn.
It could well be that the most significant impact is on labour force participation and supply, rather than unemployment. This would increase the risk of a sustained pick up in wage inflation.
A marked pick-up in global inflation could prove stickier than central banks and the markets expect. Covid is proving a difficult bug to shake, and seems likely to continue dominating the economic landscape for a long time.
- Oliver Mangan is chief economist at AIB